Insights: 2016 Metricon land tax decision

Land tax is assessed and is payable annually unless an exemption applies.

The Metricon case is the current definitive authority when considering whether the dominant use land is one or more of the prescribed primary production activities and exempted from land tax or otherwise.

The Metricon case represents a turning point in land tax law in favour of taxpayers.

This is particularly important when you consider that the NSW Office of State Revenue overwhelmingly defeats taxpayers in land tax cases who typically have not engaged an experienced practitioner in the planning process or when challenging land tax assessments.

Below are a number of key take away points for practitioners and land developers alike:

Land tax refunds: taxpayers who have paid land tax on land which is in preliminary planning stages are encouraged to seek legal advice on whether a partial or total refund of land tax is available in circumstances where primary production activities were conducted on the subject land.

Potential Court of Appeal activity: given the significant revenue implications to the NSW Government, it is possible the NSW Office Of State Revenue will seek leave to appeal the Metricon case. However, until such time an appeal is lodged and determined, the principles in the Metricon case are binding on taxpayers and the NSW Office of State Revenue. This should be noted in the context of above point no. 1.

Establish and maintain prescribed primary production activities to secure your land tax exemption: it is not enough to put a few cows, sheep or horses and expect to secure valuable land tax exemptions. You must make an assessment of whether sufficient use of land is present in circumstances where land tax is otherwise payable.

Perform work offsite and keep records: planning and sale activities should be conducted offsite to the fullest extent possible. Visitor logs should be established and maintained to evidence that non-concessional use of land is confined to the minimum.

Tax timing of major project development: as land tax is assessed at 31 December each year, consider the timing point at which significant physical works are conducted as land tax will apply where the dominant use of land is commercial land development. This will be important for project modelling tax consequences of land development.

Please contact Stratos Lawyers to make an appointment to discuss opportunities to seek land tax refunds and for guidance on land tax positions on future and ongoing land development projects.

Background

On 31 March 2016, Justice White delivered his judgment in the land tax decision of Metricon Qld Pty Limited v Chief Commissioner of State Revenue (No. 2) [2016] NSWSC 332.

The Metricon case is the most recent and definitive land tax case concerning the application of the primary production land tax exemption in New South Wales; having said this, it is likely that Supreme Courts in other States and Territories may follow the principles set down in the Metricon case.

The law before the Metricon case

The primary production land tax exemption in section 10AA of the Land Tax Management Act 1956 (NSW) broadly operates to exempt land owners from land tax if the “dominant use” of the subject land falls within prescribed primary production activities.

Prior to the Metricon case, a subset of land tax cases were decided in the formerly NSW Administrative Decisions Tribunal (now the NSW Civil & Administrative Tribunal) which meant the term “use” was expanded to include intangible uses; this resulted in significant uncertainty in applying the law to establish which use was “dominant”, particularly in cases involving physical and intangible usage.

The land tax legislation does not provide a statutory definition of “use” and under rules of statutory interpretation, it must take its ordinary meaning; as the Metricon case demonstrates, this itself presents a difficulty as there are many ordinary meanings of the term “use”.

The Metricon case

Briefly, the facts involved a major land developer acquiring and holding large parcels of land for urban development. Throughout the ownership period under consideration, cattle were grazed upon the subject land; the issues for determination were therefore, was the cattle grazing the “dominant use” of the land and the character of land development activities as a “use” of land.

Justice White’s conclusions at paragraph [24] are cited below:

I have concluded that the comparison required by s 10AA(3) of a primary production use with other uses is not confined to a comparison with other physical uses. But I have also concluded that Metricon’s holding of the lands as part of its stock in trade was not a current use and that the consultants’ work was done and associated expenses were incurred in connection with a current commercial land development use of the lands only to the extent the land was physically used in carrying out activities directed to obtaining requisite approvals. Otherwise the work was done and expenses were incurred in connection with an intended future use.

Firstly, the Metricon decision affirms the existing case law on land tax which interprets the expression “use” to include intangible uses. Examples of intangible use include renting land and taking fees for agistment of livestock and weather observations.

Secondly, there is an element of common sense in the application of the land tax exemption. Per Justice White (at para [70]):

But “use” does require doing something with the land, whether it be using it physically or by putting it to advantage, for example, by letting it.

Thirdly, the “use” of land must be a current use and not a future use. A taxpayer which holds land as part of its stock in trade (also known as “trading stock” or “inventory” for accounting and tax purposes) does not necessarily use that land to the necessary degree for land tax purposes. Per Justice White (at para [73]):

It is clear from Leda Manorstead that a land developer uses land that is its stock in trade by commencing excavation or construction activities for the purposes of sale and does not only use it when the lots are sold. In my view a developer may also use land for the purpose of obtaining necessary approvals such as by engaging surveyors to go onto the land to plot its boundaries, or drillers to dig holes to ascertain subsurface conditions. But in my view, the engaging of consultants to prepare reports for the purposes of obtaining approvals where the work involves no physical use of the land does not involve a current use of the land. Rather, it is work carried out for the intended future use of residential development.

Its use of the lands would have been the same whether the lands were acquired with debt or equity and whether the market value increased or decreased. Neither the deduction for borrowing expenses, nor the deduction for bringing forward the loss arising from the decline in market value, involved doing anything with the land; neither employing it, nor putting it into service, nor turning it to account. The deductions were available whether the land was used or merely held. The claiming of available deductions did not convert the holding of land to a use.

Fifthly, commercial land development activities are not necessarily a “use” of land. Planning activities are directed towards a future intended use of land as stock in trade; current use in the planning phase of development is by reference to the carrying out of physical activities on the land, which is typically minimal in the overall scheme of land development. Per Justice White (at para [125]):

Their only current use for residential development was to the limited extent the lands were physically used by being used for the carrying out of preliminary activities necessary for the obtaining of requisite approvals for future residential development. It is admitted, and I would in any event conclude, that that use of the land for obtaining requisite approvals does not have a character or intensity that would mean that the primary production use was not dominant.